Newsletter - May 31, 2022
Oil / Commodities
- EU leaders agreed to pursue a partial ban on Russian oil, paving way for a sixth sanctions package to punish Russia and President Putin for the invasion of Ukraine. The sanctions would forbid the purchase of crude oil and petroleum products from Russia delivered to member states by sea but include a temporary exemption for pipeline crude. The latest sanctions package would cover more than 2/3 of oil imports from Russia, cutting a huge source of financing for its war machine. Officials and diplomats still have to agree on the technical details. The European Commission has purposed to ban seaborne crude oil six months from inaction, while refined petroleum products would be halted in eight months. Shipments of oil through the giant Druzhba pipeline to central Europe will be spared until a technical solution is found that satisfies the energy needs of Hungary and other landlocked nations. The bulk of current pipeline deliveries are to Germany and Poland, which have signalled they will wean themselves off Russian supplies regardless of any EU action. If both countries follow through, the total effect, along with the latest ban on seaborne imports, would be cut to 90% of Russian crude oil sales to the EU by year’s end, or equivalent to $10 billion in lost export revenue for Russia. The newest sanctions package also proposes a ban on insurance related to shipping oil to third countries, but it will not take effect until six months after the adoption of such measures. Overall crude shipments edged higher in the seven days to May 27th, shrugging off mid-month EU restrictions that trading houses see as prohibiting them from dealing with Russian state energy companies. A total of 34 tankers loaded 25 million barrels from the country’s export terminals. That put average flows to 3.58 million barrels a day, up 4% from 3.44 million in the week ended May 20th.
o bloomberg.com/news/articles/2022-05-30/eu-leaders-back-push-to-ban-some-russian-oil-over-putin-s-war?srnd=premium-asiaprp
- A record volume of Russian oil is on board tankers with unprecedented amounts heading to India and China as other nations restrict imports due to the ongoing war situation in Ukraine. Between 74 million and 79 million barrels from Russia were in transit and floating storage over the past week, more than double the 27 million barrels just before the February invasion of Ukraine. Asia overtook Europe as the biggest buyer for the first time in April. China and India have snapped up millions of barrels from Russia to take advantage of hefty discounts on the flows.
o https://www.bloomberg.com/news/articles/2022-05-26/russia-has-record-oil-volumes-at-sea-as-cargoes-shift-to-asia?srnd=premium-asia
- Oil is headed for the longest run of monthly gains in more than a decade as the EU agrees to pursue a partial ban on Russian crude imports. Global benchmark Brent topped $122 a barrel, hitting a two-month high. Crude has soared this year amidst intensifying conflict in Eastern Europe that have threatened supply, and depleting stockpiles. Brent and WTI are on course to close out a sixth monthly climb in May. The oil market remains in steep backwardation. Brent’s prompt spread was $3.91 a barrel in backwardation, up from $2.20 in April.
o https://www.bloomberg.com/news/articles/2022-05-30/oil-extends-sixth-monthly-gain-as-eu-set-to-curb-russian-supply
- China will add enough new solar power this year to nearly double last year’s record amount of installations as the country accelerates its clean energy drives. The nation is set to add 108 gigawatts of solar power to the grid this year, up from 54.88 gigawatts in 2021. There are 121 gigawatts of solar projects currently under construction. China currently has the world’s largest renewable power fleet with 323 gigawatts of solar and 338 gigawatts of wind. President Xi’s government is aiming for 1,200 gigawatts combined by 2030.
- China lithium stocks are on a tear as virus curbs signal easing for supply chain disruptions and boost demand from EV makers. Shares of major producer Tianqi Lithium have rallied 66% after hitting a low in late April, outstripping a 6% advance by the benchmark CSI 300 Index during the period. Ganfeng Lithium and Chengxin Lithium surged about 30% and 40%, respectively, in onshore trading. The jump in lithium shares underscores expectations for demand to climb when automakers ramp up production in Shanghai as the city reopens. Lithium is expected to see stronger demand in China in the second half as carmakers boost output to meet annual targets. The downside risk is that the continued surge in lithium prices could amplify costs along the supply chain and squeeze margins of battery manufacturers and EV makers, leading to negative sentiment for the EV and battery supply chain.
- Japan has successfully tested a system that could provide a constant, steady form of renewable energy regardless of wind or the sun. For more than a decade, Japanese heavy machinery maker IHI Corp has been developing a subsea turbine that harnesses the energy in deep ocean currents and converts it into a steady and reliable source of electricity. The giant machine resembles an airplane, with two counter-rotating turbine fans in place of jets, and a central fuselage housing a buoyancy adjustment system. Dubbed the “Kairyu”, the 330-ton prototype is designed to be anchored to the sea floor at a depth of 30 to 50 meters. In commercial production, the plan is to site the turbines in the Kuroshio Current, one of the world’s strongest, which runs along Japan’s eastern coast and transmit the power via seabed cables. The Kuroshio Current is estimated to potentially generate as much as 200 gigawatts of power, which is equivalent to about 60% of Japan’s present generating capacity. The advantage of ocean currents is their stability. They flow with little fluctuation in speed and direction, giving them a capacity factor – a measure of how often the system is generating power – of 50% to 70%, compared with around 29% for onshore wind and 15% for solar. The Kairyu prototype proved it could generate 100 kilowatts of stable power and IHI Corp now plans to scale up to a full 2 megawatt system that could be in commercial production in the 2030s or later.
o https://www.bloomberg.com/news/features/2022-05-30/japan-s-deep-ocean-turbine-trial-offers-hope-of-phasing-out-fossil-fuels?
Tech
- Bitcoin rose the most in two weeks, trading above $30,000 as investors and strategists are placing bets that the cryptocurrency is showing signs of bottoming out. The largest cryptocurrency was up 5.2% to $30,687 in the afternoon in New York Monday, marking its biggest increase since May 15th. Ether and smaller tokens which got pummelled last week were also up. The correlation between Bitcoin and stocks started to break down last week as the S&P 500 posted its biggest weekly gain since November 2020, while Bitcoin fell for the eight straight week in a row. But crypto will likely catch up to close the gap a bit in the near-term. Some are seeing heavy buying of Ether and several altcoins, a pattern that mirrors trends observed in July 2021 and January 2022 when related performance bottomed.
- Meta Platform’s continuing battle with German regulators is creating a roadblock for the country’s nascent virtual reality industry. Local start-ups have been struggling to get their hands on Meta’s Oculus headsets after they were pulled from shelves. Now they have to choose whether to develop applications using less popular rival headsets, or give up on the fast-growing $4.4 billion market. Oculus headsets were removed from the German market in 2020 after the country’s top court confirmed an allegation that Facebook was abusing its dominant position. Later that year, the Federal Cartel Office opened a probe into the requirement that the Quest 2 headset users register a Facebook account in order to operate the device. Meta remains the world’s top VR headset maker, with 80% market share. customers have spent over $1 billion on Meta’s Quest store content, in part driven by the rise of metaverse trends that blend gaming, VR and social media. JPMorgan estimates spending in the metaverse could eventually reach $1 trillion.
o https://www.bloomberg.com/news/articles/2022-05-30/meta-s-german-oculus-blockade-has-startups-facing-harsh-reality?srnd=technology-vp
Electric Vehicles
- Japan’s top three automakers saw their output in China slashed by double digits in April, highlighting the toll Shanghai’s lockdowns is taking on manufacturers operating in the world’s largest car producing nation. Honda production in China fell 81% from a year earlier in April. Output for Toyota and Nissan in China slid 34% and 51% year-on-year, respectively. In addition to production suspensions due to Shanghai lockdowns, the automakers’ production levels in the country have also been crimped by exacerbated chip supply shortages.
- Toyota is poised to repeat as the world’s largest automaker for a third consecutive year, having outsold VW by more than 1 million vehicles through April. While both automakers’ China operations have been hit by the latest lockdown measures, Toyota has fared better to limit the damage. Toyota said worldwide deliveries slipped 5.8% in the first four months of the year, whereas sales for its German rival plunged 26%.
- Shanghai’s two-month lockdown and COVID restrictions in cities from Beijing to Tianjin have had a deleterious effect on consumer confidence, leaving the Chinese economy reeling. Not a single car was sold in April in Shanghai. At the start of the year, the China Passenger Car Association was forecasting 5.5 million EVs to be sold in 2022, up from 3.3 million last year. that could be under threat now, as automakers struggle to operate at full capacity given recent COVID constraints. Many domestic EV makers like XPeng and Li Auto have seen deliveries plunge in April from March. Even EV titan Tesla has not been able to escape from the grip of the latest COVID turmoil. A 60-billion-yuan tax cut on new car sales will mostly aid fossil fuel powered cars instead, given EVs are currently exempt from the 10% purchase tax which is set to expire at the end of the year. The end-of-year cliff edge for EV subsidies is a timely reminder of how much more expensive battery powered cars could get without further government support, especially given the recent pressure on battery prices. But regional governments are pitching in to help EV makers too. Shandong is providing subsidies for fossil fuel and EVs, while Shenzhen and Guangzhou are offering 10,000-yuan subsidies for EVs and expanding license plate quotas for petrol and diesel-powered cars. Over the weekend, Shanghai has also increased the quota for car ownership by 40,000 units and offered subsidies to EV buyers.
o https://www.bloomberg.com/news/articles/2022-05-30/china-s-ev-growth-forecasts-are-starting-to-look-shaky?srnd=hyperdrive
Consumer / Retail
- Companies from retailers to manufacturers will hold greater inventory levels this summer as global supply chain snarls force a shift from a just-in-time mentality to a just-in-case one. Shanghai has as many as 300,000 containers that have yet to leave the city’s port. Ocean freight disruptions this summer could be similar or even worse than last year. Inland logistics in both China and the U.S., which carry about ¾ of China’s total freight, remains well below the weekly average in 2019. As Shanghai slowly emerges from its harsh COVID restrictions, similar constraints will be observed in the U.S. and Europe, causing another supply chain bottleneck.
o https://www.bloomberg.com/news/articles/2022-05-30/inventory-levels-seen-ballooning-as-companies-turn-cautious
China Market
- Shanghai will let people in areas deemed low risk for COVID to leave their housing compounds, a significant step towards dismantling the last remaining restrictions of the recent lockdowns. The city will resume taxi and ride hailing services and allow cars on roads in low-risk areas. Bus, subway and ferry services will also resume in an orderly manner beginning Wednesday. Beijing is also seeing a declining caseload that has supported easing of some curbs on movement and resumed some public transport.
- China, once the primary rival to Silicon Valley’s technology success, is now leading the global decline in VC investments. The value of venture deals in the country declined 44% to $24.7 billion in the first four months of the year. That is almost twice the rate of decline in the U.S. and nearly four times the pace of the global slide. After more than a decade of surging valuations, the global technology sector has taken a beating, with prominent stocks like Amazon and Tesla tumbling, and venture investors pulling back from high-risk deals. Sequoia Capital warned founders and chief executives last week that the good times are over and they need to prepare for a new era with severely constrained access to capital. China’s situation has been further aggravated by Beijing’s crackdown on tech giants and rigid policies set to stamp out COVID infections. China hit a record of more than $130 billion in venture deals in 2021 despite the government crackdown, which was more than 50% higher than the year before. More investments are going into sectors favoured by the Communist government, including renewable energy and EVs. The biggest deal so far this year included an $800 million Series B round for a supply chain technology unit of JD.com driven by Hillhouse Capital and Warburg Pincus, and a 5 billion yuan bet on chipmaker Guangdong Fenghua Advanced Technology Holding from investors including UBS and China Merchants Capital.
o https://www.bloomberg.com/news/articles/2022-05-30/china-is-leading-the-global-contraction-in-venture-capital-deals?srnd=premium-asia
Russia-Ukraine Development
- Ukraine President Zelenskiy visited front-line troops in the Kharkiv region in his first trip away from Kyiv since Russia’s invasion. He earlier called conditions in the Donbas region to the east as indescribably difficult as Russia presses to take more ground approaching the invasion’s 100th day. President Zelenskiy also confirmed that he had fired the head of Ukraine’s security service in the Kharkiv region, as he had not been trying to protect the city’s best interests. Meanwhile, EU nations failed to reach an agreement on Sunday regarding a revised package of sanctions over Moscow that included a ban on Russian crude.
o https://www.bloomberg.com/news/articles/2022-05-29/ukraine-latest-eu-sanctions-plan-would-spare-key-crude-pipeline
- Ukraine President Zelenskiy visited troops in the Kharkiv region, his first publicly known trip outside the Kyiv area since before Russia’s invasion, in a show of confidence for the nation’s defenders. He handed out state awards and valuable gifts to servicemen and servicewomen, and had briefings on the operational situation. President Zelenskiy most recently visited Ukrainian defensive positions in the eastern Donbas region on February 17th, a week before Russia’s invasion. In early March, he made an unannounced visit to the edges of Kyiv while fighting was still going on nearby. Most of President Zelenskiy’s recent travels have been in Bucha on the outskirts of the capital, where Russian troops have been accused of atrocities against the civilian population. During his visit, head of Kharkiv Regional Military Association Oleg Synegubov told President Zelenskiy that 31% of the region’s territory remains temporarily occupied and that 5% had been liberated from Russia.
o https://www.bloomberg.com/news/articles/2022-05-29/zelenskiy-visits-troops-near-kharkiv-in-rare-foray-from-capital
Market Update
- Stocks fell in Asia trading Tuesday and Treasuries sold off across the curve as investors remain cautious about whether central banks can raise interest rates to rein in inflation without derailing growth; U.S. contracts opened higher in the first day of trading after the Memorial Day weekend, while yields on 2-year notes jumped 10 bps to 2.58% and 10-year yields rose 10 bps to 2.84%
o S&P 500 futures were little changed
o Nasdaq 100 futures rose 0.3%
- Global stocks are on track to end the month with modest gains amid skepticism about whether the market is near a trough and as volatility stays elevated; fears that central bank rate hikes will induce a recession, stubbornly high inflation and uncertainty around how China will boost its flailing economy are keeping investors watchful
- In the U.S., Federal Reserve Governor Christopher Waller said he wants to keep raising interest rates in half percentage point steps until inflation is easing back toward the central bank’s goal of 2%
o https://www.bloomberg.com/news/articles/2022-05-30/fed-s-waller-backs-half-point-rate-hikes-at-several-meetings
- President Joe Biden will hold a rare Oval office meeting on Tuesday with Fed Chair Jerome Powell amid the highest inflation in decades and ahead of U.S. payroll numbers later this week
- Oil gained after the EU backed a push to ban some Russian oil, with WTI crude advancing to around $117 a barrel
- Gold futures dropped 0.4% to $1,847.65 an ounce
- Bonds in almost every corner of the $63 trillion global debt market are bouncing back as investors begin to see value once again in fixed income assets. Global investment grade debt has returned almost 1% in May, the first monthly gain since July, while U.S. Treasuries are heading for their best month since November. A gauge of global corporate debt is set for its biggest advance since July, while emerging market sovereigns from Mexico to Malaysia are also in the green. Signs that the global economy is in danger of recession, speculation the rush of central bank rate hikes are now largely priced in, and the simple fact yields have risen enough to make bonds attractive are some of the reasons for the asset class’s recent recovery. The rally in bonds has already pushed U.S. 10-year Treasury yields down to 2.84% from a three-year high of 3.2% set in early May. Meanwhile, investors remain skittish on Chinese debt as COVID-linked lockdowns and uncertainties over the nation’s troubled property market deter buyers.
- China’s COVID-Zero strategy is set to stay in place for the rest of the year, intensifying the world’s supply chain woes and challenging efforts by central bankers to rein in inflation that is running at multi-decade highs. While there are signs that China’s COVID infection rates are waning and strict controls are being rolled back, many believe Beijing will continue to stand behind its severe lockdown policies. This has induced more risk to China’s economic growth outlook than ever before. Most investors believe that stocks in the $17 trillion Chinese economy will keep underperforming. Closed factories and few workers on the production lines are also fuelling risks of elevated headline inflation that is denting consumer spending globally. On the flip side, investors remain optimistic that Trump-era tariffs will be removed and Beijing’s disruptive clampdown on technology is coming to an end. Minutes from the latest Fed meeting published last week also showed monetary officials worry that China risks adding to U.S. price growth.
Summary
- Micro – Equities are expected to continue gains from last week and end the month on modest gains, posing a direct contrast to the past four months of losses investors have stomached since the beginning of 2022. U.S. contracts opened higher Tuesday after the Memorial Day long weekend, signalling that some are confident that equity valuations have troughed. However, skepticism remains on whether the Fed’s planned rate hikes to quell 40-year high inflation could risk tightening the economy into a recession. Consumer spending is starting to wane, while industry earnings are starting to see the impact of rising input costs as well, with some even slowing hiring amidst economic uncertainty. A potential inventory build-up is risking a discounted selling spree coming summer, while an employment slowdown could add to the turmoil and trigger a downward death spiral to the economy in the worst-case scenario.
- Macro – Market participants are paying close attention to China’s easing lockdowns, easing central bank policies, and various government supports aimed at shoring up its economy, which has been flailing with an unstoppable property slump that has been exacerbated by its COVID Zero strategy. These have all added pressure to already-fragile global supply chain constraints, risking a spill over effect on the global economic outlook. Traders have already showed signs that they are ready to go back into bonds as a haven against a potential economic downturn, with Treasury yields falling back below to the 2.8% range after a selloff that pushed the figure to 3.2% earlier this month. Elsewhere, oil continued to edge higher towards the sixth consecutive month of gains, as the EU contemplates a ban on seaborne Russian crude that could cut about 90% of its usual energy imports from the country. Depleting stockpiles ahead of the summer traveling season, paired with easing mobility restrictions in China have also added to the rally.